Who wouldn’t want student loan forgiveness? After all, having someone else pay for your student loan debt sounds like a pretty good deal. Some of the programs even offer this student loan forgiveness as a tax-free benefit. Others create a large “tax-bomb” that must be paid at the end of your student loan forgiveness period. If you have ever thought about pursuing Public Service Loan Forgiveness (PSLF) or forgiveness through the Income Driven Repayment Programs, then this epic all-inclusive guide is for you.

In each of the programs, we will discuss whether you qualify or not. We will also discuss the the various features of each, including whether the forgiveness is tax-free or not.

Who Should Pursue Student Loan Forgiveness?

Anyone who has read my book (The Physician Philosopher’s Guide to Personal Finance) will know that I am not a fan of keeping debt around. So, if you are going to enter into the forgiveness programs mentioned below, which often require 10-25 years worth of payments, then you need to have good reason.

That doesn’t answer the above question, though. Who should pursue student loan forgiveness?

Here are some guidelines for who should pursue student loan forgiveness:

If your Debt to Income Ratio is >2 (i.e. you have $200,000 in student loans and your annual income is $100,000)

You have a long training paradigm (i.e. you are training to become a neurosurgeon and have a 9 year training program at a 501c3).

If you are planning to work at a qualifying PSLF employer anyway (i.e. you are a medical professional going to work for a 501c3).

Public Service Loan Forgiveness (PSLF)

This is the student loan forgiveness program that has received the most visibility.

Public Service Loan Forgiveness was introduced in October of 2007. The gist of the program is that after you make 10 years of monthly qualifying payments (i.e. 120 payments), you will then receive forgiveness on your student loan debt after successfully filling out an application.

However, this program has had some negative press lately after reports were published that showed 99% of those who applied for forgiveness were denied. In fact, only 96 people out of 28,000 received forgiveness.

That’s not the whole story, though.

Of that 99% rejection rate, 70% of people who applied did not make 120 qualifying payments. In other words, they had loans that didn’t qualify or were making non-qualifying payments. For this reason, the qualifications will be discussed at length below.

Non-qualifying payments cover 70% of the people who got denied. Another 28% were denied because they filled out the paperwork incorrectly. They had missing or incomplete information. This shows the length people should go to have complete documentation.

Is Public Service Loan Forgiveness worth the trouble?

With this high failure rate is PSLF really worth it?

I’d argue for the three groups of people outlined above, it is still worth the trouble. You must recognize, though, that if the government is going to forgive hundreds of thousands of dollars in student loans – they want to make sure you’ve followed through on your part.

The reason why all of this work is worth the hassle is that (unlike in other programs discussed below) student loan forgiveness received through public service loan forgiveness is tax-free. In other words, if you were forgiven $250,000 in student loan debt through PSLF, you would not owe any taxes on it.

That is a huge benefit, and one that seems worth the trouble to me. I make special mention of this, because several of the other programs outlined below do not provide tax-free forgiveness.

Will Public Service Loan Forgiveness still exist?

The short answer is, yes you should have some trust that PSLF will continue to exist if you are already enrolled in the program and making payments. If you haven’t yet entered into the program, I am not sure that you can have the same positive outlook.

There have been legislative efforts in the past (e.g. the PROSPER act) and presidential budgets (like this one from President Trump) that have called for the end of the Public Service Loan Forgiveness program. All of these efforts have not panned out.

Even if they did, it is unlikely that they would not allow people currently enrolled in the programs to be “grandfathered” into any changes that are made.

Regardless, the best course of action is to create a PSLF side fund just in case. If PSLF is banished, this will allow you to have options. If it remains intact, you are that much closer to financial independence.

Do I Qualify for PSLF?

In order to receive PSLF, you must make 120 qualifying payments on qualifying loans. We will discuss below what makes a payment qualified. Before we answer that, we must discuss which loans can be forgiven.

The only loans that can be forgiven through PSLF are “direct” federal loans. Look at your loans. If it doesn’t have the word “direct” in front of it, then it doesn’t qualify.

Don’t worry if this is not the case, though. All is not lost. The federal government gives you the opportunity consolidate your loans through a direct consolidation loan to allow your loans to qualify.

However, if you decide to go this route you need to know two key things about consolidation:

Consolidation Restarts the Clock. If you have been making payments towards PSLF and then decide to consolidate, you will lose any progress you have made. Your next payment after consolidation will be considered payment number 1 of the 120 you are required to make.

Some Loans Don’tQualify. Some loans don’t qualify even if you consolidate them. One of the best examples of this includes “PLUS” (Parent PLUS or Graduate PLUS) loans. These do not qualify for most PSLF programs. There is one exception. You can utilize the Income Contingent Program outlined below, but this requires a monthly payment of 20% of your income. That’s a pretty steep price to pay to get these loans included.

You can choose which loans to consolidate. Don’t feel stuck with that prior point. Choose which loans to consolidate. You do not have to consolidate them all. You could choose to consolidate all of your non-PLUS loans and seek forgiveness for these while paying off the PLUS loans.

Note: If you want to know more about which loans are eligible for which program, and which loans can be consolidated for each program – check out this table provided by StudentAid.Gov.

What Kind of Payments Qualify for PSLF?

In order to take advantage of PSLF, you must meet four specific qualification standards. Qualified work, loans, and employment all while in a qualified program.

Let’s briefly discuss each of those items in turn:

Qualifying Work

In order to take part in PSLF, you must be working full-time (defined by your employer or 30 hours per week – whichever is greater) at a qualifying employer.

Qualifying Program

There are five programs that qualify for PSLF: the four Income Driven Repayment programs (PAYE, REPAYE, IBR, ICR) and the Standard Repayment Program (SRP). We will discuss the qualifications of the first four below, because you can receive forgiveneess directly through the IDR programs.

The standard repayment program simply involves making payments that would have your loans paid off 10 years after entering the program. This SRP payment also serves as the “cap” for the PAYE and IBR programs. In other words, your payment in PAYE and IBR can never exceed the SRP payment.

Given that your loans would be gone after 10 years in SRP, it may seem strange to say that those in SRP qualify for loan forgiveness at the end of the 10 year period. Wouldn’t all the debt be paid off anway?

Not necessarily.

For example, physicians may choose to enter into REPAYE as a resident and fellow, PAYE in their last year of training to cap the payments, and then SRP for the last few years of payments as an attending physician. This might result in 5 years of REPAYE payments, 1 year of PAYE payments, and 4 years of SRP payments. These 10 years in the qualfying programs – including SRP – would qualify this person for PSLF.

Does my Employer Qualify for PSLF?

Not all employers qualify for PSLF. Here are the two broad categories of those who qualify for PSLF: 501(c)3 employers (not-for-profit) and governmental employers (school systems, VA hospitals, etc).

You must work full-time at a qualifying employer and you should submit certification paperwork to make sure your employer qualifies.

If you want to know if your employer qualifies, you can look up their tax-exempt status on the IRS website utilizing this Tax-Exempt Organization Search. Select the city, state, and switch the search criteria to “organization name.”

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High Yield Tips for Pursuing PSLF

Everything has checked out. You are the right kind of person to pursue PSLF. You are sure your loans qualify and that you can make qualifying payments in the right kind of program (discussed more below) while working full-time for a qualifying employer.

What else should you know?

Consolidate Early

You should consolidate as early as possible after you finish school/training, if pursuing PSLF. The reason is that your payments are typically the lowest when you are just starting out.

All of the payments listed below are based on your discretionary income (AGI – 150% of Poverty Line). If your AGI was zero, because you made no income while in school last year, then your payment will also be zero.

For this reason, don’t get lazy on me and enter into the “grace” period provided for six months after school ends. I am looking at you, interns who are single! You should consolidate during that period and enter into your planned IDR program so that you can make as many “Zero dollar” payments as possible.

Certify Multiple Times

However, best practice is to continue to do this at least once each year. And you must make sure you fill out everything correctly on the form including the Employer Identification Number (EIN), name, etc.

Given that the government is not as good as you are in keeping track of records, it is probably worth re-certifying your employer twice each year just to make sure you are still on track. It is no fun finding out that your last 12 months of payments weren’t certified and won’t count.

Keep Good Records

Speaking of records, make sure you keep great records. Not only should you certify your employer, you should certify any mail that you send to Fed Loans throughout this process.

Make copies of forms you submit to them and keep track of the certified mail receipts you receive to document your correspondence.

Be an Expert in Your Plan

It is important to know all of the details of your plan. For example, those enrolled in REPAYE should know that their spouse’s income is considered in the monthly payment calculation regardless of their tax filing status (joint or separate). In PAYE, there is a cap on the amount of interest that can capitalize.

Be an expert in your plan.

Student Loan Forgiveness Through Income Driven Repayment

There are two different kinds of forgiveness offered to those who have federal student loans. Why do they offer two kinds of forgiveness?

Well, not everyone qualifies for PSLF. Say, for example, you are dentist in private practice who has a debt to income ratio of 3 (Debt = $600,000; annual income = $200,000). Your employer doesn’t qualify for PSLF. Are you stuck footing that bill?

The short answer is no. You can receive forgiveness directly through one of the four Income Drive Repayment programs (PAYE, REPAYE, IBR, and ICR).

We will discuss each of these programs in turn, including how to qualify for each program. While these four programs qualify you for PSLF, they also offer forgiveness directly through each of them as well.

Not all Forgiveness Is the Same

Before we get to the four programs we must discuss one key difference with these programs when compared to PSLF.

Unlike PSLF, student loans forgiven through IDR programs is not tax-free. In other words, the forgiven debt is viewed as additional annual income by the IRS.

This is affectionately known as the “tax-bomb” by those of us who write about student loans.

What is the tax bomb? Let’s say that you make payments in your IDR program for a long enough period to receive forgiveness and you have $250,000 in student loans at this point. In the eyes of the IRS this would be viewed as a $250,000 annual bonus.

If you were in the 32% tax bracket, you would have to pay taxes on 32% of your $250,000 in student loans that were forgiven. This would amount to an additional $80,000 tax bill.

For this reason, if you seek forgiveness through the programs discussed below, please save money in a side fund with the intent of paying this tax bill when it comes due. Don’t get caught having to create a payment plan to the IRS on interest when you just escaped making payments on student loans for the past 20-25 years.

Revised Pay as You Earn (REPAYE)

REPAYE changed the game. It is a revised version of PAYE, which is below. During training, this is the default program you should choose until proven otherwise.

The reason is that it provided an effective interest rate reduction, because the Department of Education pays 50% of any remaining interest that is not covered by your monthly payment. For example, say you are gaining $1,200 in interest each month and your monthly payment is $200. There is $1,000 in remaining interest, and the government will pay half of that ($500) for you.

This is often better than the rate you can get through student loan refinancing. So, even if you don’t plan to pursue PSLF – REPAYE is often the best option.

First, There is no cap on the REPAYE payment. So, when your income increases dramatically (when residents become attending physicians), this can cause issues. 10% of a resident salary isn’t much. 10% of an attending salary will hurt. This is why many people switch to PAYE, which caps monthly payments, in the last part of training.

Second, in REPAYE, your spouse’s income is considered regardless of your filing status. So, for very high income earners without a substantial amount of debt, REPAYE might not be the best plan.

How long to forgiveness in this program?

In REPAYE, your loans are forgiven after 25 years of payments. At this point, you can expect to pay your “tax-bomb.” So, save up!

This is where REPAYE falls short. Other programs below will forgive your loans after only 20 years.

Do you qualify?

Unlike other programs, there are no stipulations about the year in which you borrowed.

Pay as You Earn (PAYE)

PAYE was the original game changer to lower monthly payments. It was better than its predecessors by a significant margin.

The problem is that not as many people qualify for PAYE, as you’ll see below. That said, if you are seeking student loan forgiveness through an IDR program, then PAYE provides the fastest forgiveness.

Monthly Payment Calculation

The monthly payment under PAYE is the same as it is under REPAYE, 10% of your discretionary income.

However, it comes with one major advantage over REPAYE. The PAYE monthly payment is capped at the Standard Repayment Program (SRP) monthly payment.

So, while REPAYE’s monthly payment can exceed the SRP payment, PAYE will never exceed that amount. Hence, why it is good to switch to PAYE before your income rises.

How long to forgiveness in this program?

Loans in PAYE are forgiven after only 20 years, which is 5 years sooner than in REPAYE. Again, you will have to manage the “Tax-bomb” at the end of this, but at least it has had less time to grow.

Do you qualify?

Qualifying for PAYE is not as straightforward as REPAYE.

Here are the requirements:

Your payment in PAYE must be less than the SRP when you enter the program (i.e. you have to document a “financial hardship”)

PAYE requires you to have no outstanding direct or FFEL debt that originated before October 2007.

You have to receive a direct loan disbursement after October 1, 2011.

Income Based Repayment (IBR)

You’ll notice that as we go down this list, it gets more and more complicated. It also gets less advantageous with each program.

Nevertheless, we carry on.

Monthly Payment Calculation

The monthly payment in IBR depends on when you borrowed. If you borrowed loans before July, 2014 then your monthly payment is 15% of your discretionary income. That is 150% worse than in REPAYE and PAYE.

However, if you borrowed your first loans after July, 2014 then your monthly payment in IBR will be the same as it is for PAYE and REPAYE (10% of your discretionary income).

The one saving grace here is that the payment is capped just like in PAYE. Your monthly payment can never be larger than the SRP payment.

How long to forgiveness in this program?

Again, PAYE is better here.

In IBR if you borrowed before July, 2014 then it takes 25 years to get to your tax-bomb student loan forgiveness.

However, if you are a new borrower after July 2014, then it only takes 20 years (like PAYE)

Do you qualify?

Qualifying under IBR is easier than it is under PAYE. You have to document the same financial hardship (that your IBR payment is less than the SRP payment). However, you aren’t disqualified if you borrowed loans too long ago.

That said, it comes with strings attached for anyone who initiated their loan borrowing before July 2014 as mentioned above.

Income Contingent Repayment (ICR)

The only time you should use this plan is if you have PLUS loans that are consolidated and prevent you from taking part in the REPAYE, PAYE, or IBR.

The reason why is that ICR has the highest monthly payment (20% of your discretionary income) and the longest forgiveness period (25 years).

It is the catch all for people who don’t qualify for other programs, but I’d advise you to stay away, if you can.

Other Options

Other options also exist for student loan forgiveness, including programs offered by individual states, the military, and for specific occupations (teachers, lawyers, health professionals, etc).

Before you decide to pursue student loan forgiveness through PSLF or one of the IDR programs, I would look into these options and make sure that you are not missing out on additional forgiveness opportunities.

For example, in North Carolina the FELS (Forgivable Education Loans for Service) program exists, which promises to pay $14,000 (Tax-free) in student loans annually for each year in school that you will match with employment in that state.

Some of my residents took part in this program while in medical school, and then obtained their full medical license while in training (which is necessary to moonlight during residency anyway). They then continued their residency training for the next three years as fully licensed physicians. These three years then counted towards the four years they owed back to the state of North Carolina.

Take advantage of these opportunities as they are provided to you in your state and in your specific situation.

Take Home

Don’t miss out on student loan forgiveness if you are the right person to be seeking it. Know your options. Become a student loan expert on these programs, and take advantage of the opportunities that are given to you.

I might add one more thing to your high yield tips. And that is how to deal with loans if you are married.

One of the snags for REPAYE is that if you are married then filing “married filing separately” doesn’t “hide” your spouses income from your repayment calculation. They did away with this provision for REPAYE.

For IBR, PAYE and I think ICR then if you file taxes “married filing separately” then only your income is used to calculate your loan repayments.

This is an issue if one of you is going for PSLF and the other spouse works but does not have qualifying federal loans.

For us, I’m doing PSLF and my wife refinanced. If we use REPAYE then both of our incomes are used to calculate my loan payments. If we use IBR or PAYE and we file our taxes separately then only my income is used for calculating my loan payments.